Field of the Invention
The present invention relates to a methods and systems for performing analysis, such as risk and regulatory checks, on electronic market orders for securities, and more specifically methods and systems for the implementation of a risk management platform and the performance of risk/regulatory checks.
Description of Related Art
In the financial industry, it has been common practice since about 1995 for institutional investors to access financial exchanges for order placement via electronic/computerized order management, routing and trading systems. Initially, these systems replaced traditional client/broker communication methods such as phone and electronic mail or other electronic messaging systems, such as those operated by Bloomberg or Reuters, while the broker maintained their traditional role of conducting order management (i.e., the placement of orders to an exchange).
However, beginning in the late 1990's, a fundamental evolution began to reshape the traditional methods of order placement and order management with the introduction of direct market access (or DMA). DMA allows institutional investors to place orders electronically, directly to a financial exchange, passing-through or bypassing the order management infrastructure of their broker.
As the financial markets continued to evolve, and DMA took on greater importance, the dependency on technology to deliver a competitive edge—particularly, by realizing increased order message throughput and lower latency—gained increasing importance. Achieving a competitive edge by achieving greater order message throughput and lower latency in exchange venue access became a principal concern for institutional investors.
Given the importance and benefits of quickly and efficiently routing orders to an exchange for execution, the DMA model evolved to include so-called “naked” access and “sponsored” access to exchanges—methodologies where institutional investors access financial markets directly, using their internal order management systems (OMS's) without transiting the order management infrastructure of their broker. With naked access and sponsored access, brokers were no longer able to conduct regulatory required pre-trade real-time risk management checks of order flow. Due to perceived danger to the markets in permitting institutional investors to utilize naked access and sponsored access, regulatory bodies, in particular, U.S.-based regulators, moved to end the practice of bypassing a broker's order management infrastructure, and have implemented regulations which require brokers, in all but a few circumstances, to conduct pre-trade real-time risk management checks of a client's order flow.
By way of example, Rule 15c3-5 under the Securities Exchange Act of 1934 requires a myriad of risk checks, regulatory checks and other order management analyses on the order message prior to permitting the order message to be routed to an exchange system. More specifically, as quoted from SEC Release No. 34-63241:
Rule 15c3-5 will require brokers or dealers with access to trading securities directly on an exchange or alternative trading system (“ATS”), including those providing sponsored or direct market access to customers or other persons, and broker-dealer operators of an ATS that provide access to trading securities directly on their ATS to a person other than a broker or dealer, to establish, document, and maintain a system of risk management controls and supervisory procedures that, among other things, are reasonably designed to (1) systematically limit the financial exposure of the broker or dealer that could arise as a result of market access, and (2) ensure compliance with all regulatory requirements that are applicable in connection with market access.
It will also be recognized that such systems that perform primary market/regulatory risk management checks may also be utilized by broker-dealers or other persons or entities with market access to perform checks on their internal exchange-bound orders. Thus, systems that perform primary market/regulatory risk management checks should not be understood in the context of the present application as being limited only to systems that perform checks on a customer's or other third party's orders.
One technological problem with the implementation of a system that performs such primary market/regulatory risk management checks is that such systems may introduce latency into the transmission of orders from the customer's OMS, through the risk check system and on to the exchange. Such latency is believed to be on the order of about 180 milliseconds. Although such latency in having the order routed to the exchange is typically measured in just milliseconds, it can introduce undesired exposure to market movements.
Thus, there is a need in the field for systems and methods that perform desired or required primary market/regulatory risk management checks, while reducing latency in the delivery of order messages to an exchange. Furthermore, because any latency in delivering an order inherently exposes the order (and the customer issuing it) to market risk, there is a further need in the field for systems and methods that further reduce such latency to ultra-low levels (e.g., to a fraction of a millisecond or the microsecond range).